Chapter 8.1 Accounting Analysis Flashcards
Reports to analyze corporate performance
strategic report
stakeholder review
financial review
directors remuneration
LSE listing req
IFRS and International Accounting Standards (IAS)
Many exchanges require additional disclosures like a 6 monthly interim report
Describe non-current asset investments
Investments in associate companies
associate company created when share ownership 20-50%
subsidiary company created where share ownership lies above 50%
What are non current assets
Assets intended to be sed by business for more than a year
List intangible non current assets
Goodwill
Trademarks
Patents
Capitalised development costs
List tangible non current assets
Property plant and equipment
Valued at net book value (NBV)
Net book value formula
NBV= cost- accumulated depreciation
What happens to freehold land over time
appreciates
annual depreciation formula
(original cost- expected residual value) / expected useful life
What are current assets
Assets held for conversion into cash:
Inventory
trade receivables
cash
Describe inventory
raw materials
work in progress
finished goods
valued at lower of cost and net realizable value
describe trade receivables
amount the company is owed on statement date
trade debtors
PREPAYMENTS
What does equity consist of
Share capital and share premium account
Reserves
What is meant by reserves and give 2 types
Amount belonging to shareholders that is retained by company
Revaluation reserve- created when company revalues assets from cost to market value
Retained earnings (profit and loss reserve)
Describe current liabilities and give examples
Amount owed by company and due for payment within 1 year
- Trade payables
- accruals
- expenses not yet invoiced
Describe non current liabilities and give examples
Amount owed by company and due for payment after 1 year
- Long term bank loans
- Bonds issued by company
- PROVISIONS eg doubtful debt
Difference between capital and revenue expenditure
capital expenditure spent to buy non-current assets and reflected on balance sheet (purchase of PPE)
revenue expenditure immediately impacts income statement (wages, rent etc)
What is FCF
Cash available after all expenses and reinvestments needed to maintain operating capacity of business have been made
How to get from operating profit to FCF
- Add back non cash expenses such as depreciation
- Subtract any increase in current assets or decrease in current liabilities
- Add any increase in current liabilities or decrease in current assets
What is enterprise cash flow
free cash flow to firm before considering payments to any debt and equity holders
Irrespective of capital strcuture
What is equity cash flow
Free cash flow to equity. Measure of how much cash can be paid to equity shareholders of company after all expenses, reinvestment and debt repayment
What is a subsidiary
Any company you have more than 50% control in
How to consolidate accounts if subsidiary not entirely owned
100% of assets, liabilities, revenues and expenses of sub added
Minority interest in shareholders funds on balance sheet
Minority interest in income statement after income tax expense
When would a company disclose a minority interest in the statement of financial position?
A subsidiary company is not fully owned by the group
Which of the following is not a heading in the cash flow statement?
Dividends paid and proposed, it is the proposed part of this statement which makes this incorrect
A company has an operating profit of £12 million. If raw materials increased by £4 million, receivables decreased by £2 million and accounts payable increased by £2 million, the operating cash flow would be:
£12 million
Which of the following would appear on a cash flow statement?
Acquisitions and disposals
The share premium account could be used in which one of the following situations?
A company does a capitalisation issue, NOT DIVIDEND
An acceptable use of the share premium account is to account for IPO costs and cover the nominal value of new shares issed via a capitalisation issue (bonus issue).
Retained earning would be used to cover the payment of a dividend if the profits for the year are not enough. An uncovered dividend.
Stock-splits do not impact the balance sheet.
In which of the following financial statements would you find proceeds on issue of bonds and equities?
Cash flow statement
Why is deferred taxation not on cash flow statement
Taxation heading in the cash flow statement shows physical cash paid in respect of corporation tax during the accounting period - not the deferred taxation which is an accounting adjustment. Cash inflows and outflows in relation to fixed assets are recorded
Where is interest shown
Income statement
Where in the financial statements would you find tax payable?
Statement of financial position
Payables, including tax payable, can be found in the statement of financial position within Liabilities.
TAX PAID is found in the statement of cash flows.
The current ratio is typically used to measure which one of the following within a company?
Liquidity
IMPORTANT; Which of the following is not part of shareholders’ funds?
Authorised share capital
ISSUED share capital is in the balance sheet - AUTHORISED share capital (the maximum the company is allowed to issue) is not in the balance sheet.
Which of the following would NOT be found in an income statement?
Deferred tax liability
Deferred tax liability would be found on the balance sheet.
Which would you NOT find as a current liability in a statement of financial position?
Interest paid - would be in cash flow statement
Dividends not paid IS A CURRENT LIABILITY
A company has completed a 1:5 stock-split. Following the stock-split the most likely impact on the company’s Debt to equity ratio will be:
It will remain unchanged
Although the number of shares issued will increase, with a stock-split the overall value will remain unchanged. As the value of equity is unchanged then the debt to equity ratio will also remain unchanged.
The company has produced its financial statements and have enclosed additional disclosures in the notes. Which of the following will LEAST likely appear in these notes?
The statement of investment principles
It CAN INCLUDE Explanation of this year’s profit/loss
What are capital reserves
capital reserves include revaluation reserves and the share premium account.
The revaluation reserve arises from the upward revaluation of non-current assets, and the share
premium reserve arises when the company issues shares at a price above their nominal value.
Capital reserves are not distributable to the company’s shareholders in the form of dividends, as
they form part of the company’s capital base, although they can be converted into a bonus issue of
ordinary shares.
What are revenue reserves
the major revenue reserve is the accumulated retained earnings of the
company. This represents the accumulation of the company’s distributable profits that have not
been paid to the company’s shareholders as dividends, but have been retained in the business.
The retained earnings should not be confused with the amount of cash the company holds or with
the income statement that shows how the retained, or undistributed, profit in a single accounting
period was arrived at.
Look at additional info on pg 266 and 267
